ESAs define risk weights for credit ratings in the EU

The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) published today two draft Implementing Technical Standards (ITS) on credit assessments by External Credit Assessment Institutions (ECAIs). By determining an objective approach for attributing risk weights to the assessments of ECAIs, as well as a prudential approach for those cases lacking factual evidence, these standards will ensure sound credit assessments contributing to financial stability in the EU.

The standards issued today by the ESAs are part of the EU Single Rulebook for banking and insurance aimed at creating a safe and sound regulatory framework consistently applicable across the European Union (EU). The work of the ESAs is intended to ensure that only credit ratings issued by External Credit Assessment Institutions (ECAIs) – those credit rating agencies registered under Regulation (EC) No 1060/2009 or central banks issuing credit ratings exempt from the application of the same regulation - can be used for calculating capital requirements of financial institutions and insurance undertakings.

In order to determine the allocation of appropriate risk weights to the credit ratings issued by ECAIs, the three ESAs have specified an approach that establishes the correspondence -or ‘mapping'- between credit ratings and the credit quality steps defined in the EU prudential regulation for banking (Capital Requirements Regulation – CRR) and insurance (Solvency II Directive). The factors and benchmarks that need to be taken into consideration to this end are specified in these ITS.

The ESAs also addressed situations where the degree of risk underlying a credit assessment cannot be ascertained due to the lack of factual evidence. Credit rating agencies that can only provide limited data sets will be required to apply a transitional period of three years, during which quantitative information can be collected in view of a second mapping which is to take place at the end of the three years.

By striking a sound balance between prudential and market concerns, these ITS will ensure the prudential use of credit ratings across the EU for the calculation of capital requirements, hence driving confidence in the EU financial sector. The standards have been submitted to the European Commission for endorsement.

Background

The proposed draft ITSs have been developed on the basis of Article 136 (1) and (3) of Regulation 575/2013 (Capital Requirements Regulation) and of Article 109 (a) of Directive 2009/138/EC (Solvency II Directive).

The Joint Committee of the ESAs consulted the public on their work on ECAIs between 2014 and 2015. Responses received were made publicly available, unless submitters requested otherwise.

Related link:

Implementing Technical Standards (ITS) on credit assessments by External Credit Assessment Institutions (ECAIs) according to the Solvency II Directive